In any practice of life, be it boxing or painting, those who want to be the greatest seek to learn from those who have already become the greatest. By observing the legends in action, you can also study what they do and determine why they do it and apply it to your own practices. Investing is no different. If someone wants to be a great investor, he must study the movements of those who have been more successful. And one of those greats is Warren Buffett.
Buffett, who was recently named the world’s richest man by Forbes magazine with a net worth of $62 billion, is considered one of America’s biggest investors. Born on August 30, 1930, in Omaha, Nebraska, Buffett’s father was a stockbroker, which gave him early exposure to investing and business. He attended Columbia Business School to study under famed economist and investor Benjamin Graham. At 24, Buffett was working with Graham on Wall Street. By 32, Buffett had combined seven existing partnerships into one. At 35, he took control of the Berkshire Hathaway manufacturing company. All of this was less than halfway through his career.
In addition to being arguably the world’s most frugal billionaire, living on an annual salary of less than $200,000, watching Warren Buffett’s actions can help teach emerging investors some serious lessons. While the vast majority of investors would be happier with stocks that make them quick money, Buffett’s strategy is more along the lines of the maxim “Slow and steady wins the race.” He only invests in companies that have been proven safe by researching his stories. Instead of looking to make a quick buck in an economic bubble that will inevitably burst, Buffett chooses investments with less volatility.
Another lesson to be learned from Buffett’s strategy is compounding. Compounding looks at how greatly an investment’s value can increase in the long run, rather than how quickly it will pay for itself in the short run. Using the rule of 72 (dividing 72 by an investment’s annual rate of return), Buffett devised a precise formula that determined how long it would take for an investment to double in value. Buffett’s annual return in the first half of his career was 29%, which meant, by the rule of 72, that he was doubling his value every two and a half years. Now stop for a moment and extrapolate that. In ten years, at that kind of rate of return, $5,000 becomes $40,000, or $20,000 becomes $160,000. The subtle method of compounding to make an investor make a lot of money over an extended period of time is something Warren Buffett dominated.
And naturally, like any other great legend, Warren Buffett can teach you the value of a strong work ethic. Buffett’s name wouldn’t be so easy to remember if he hadn’t worked hard to get what he has now. Through his ambition and diligence he managed to exercise his practices to his fullest potential. This is the only known universal characteristic in all the great heroes of history.